Setting up mortgage for Rental Property
tcmccormick
Member Posts: 9
I have looked through all the postings and have attempted to set up this mortgage we have on an STR property. Not sure I have done correctly so please advise where I may have gone wrong.
- Property purchased for 360,000 closed 5/31/2018
- 20% down payment 72,000 which shows up in Property Equity
- Mortgage after down payment 288,000 (we paid all closing cost)
- As of April pmt we have paid so far 11,032 interest and 3,774 toward principal
- Per thread I found in Wave I set up in Liabilities Mortgage Interest and Mortgage Payable and when the mortgage payment hits I post using the Transfer to these two accounts for Mortgage Interest and Payable
- I am concerned this is not set up correctly because at the bottom of this Account Balances report with dates set to when we started this rental business the amount is 546,057.88. This does not seem correct so I think I have something entered on the wrong side of the ledger or mayb entered twice. Any help is much appreciated.
0
Comments
tcmccormick,
A lot to look at there. So from I see.
You are missing the asset. Your entry to book the acquisition(don't see any closing costs) should be
Debit - Building 360,000
Credit Mortgage Pay 288,000
Credit Equity 72,000
Note here - you need to break out land from building. You can depreciate the building but not land so they should be segregated on the balance sheet. Also, if any personal property was transferred that should come out of the 360 too.
Where did the 72k come from? If owner contribution should be posted as that.
You would expense the interest and not post it as a liability. That is why you have a negative liability. Debit interest expense for the 11k and credit the liab. Should correct that.
You will also need an asset account for the escrow. As you have the payment being broken down into three they would go reduction of liability (principal) reduce income (interest expense) and increase an asset (escrow payment)
Let me know if you have any other questions. Keep me in mind if your looking for great CPA.
Mike G, CPA
www.mgfinancial.net
Affordable Solutions For
Your Small Business
Hello Mike,
Really appreciate you taking the time to help me get this set up. I have attempted to make the changes per your instructions. I think it is looking better, but still not sure I have got this right.
I have attached how my balance sheet looks now after these changes, how I set up the initial Journal entry to start the mortgage, and how I am posting my mortgage payments. I know you mentioned depreciation and I do have the house and land broke out separate, but not how or when to enter depreciation. Again thank you so much for you help!
Thanks,
Tommy
Tommy,
Yep looks much better. Depreciation is computed based upon the life of the asset. In your case, based upon the name given above, I'm assuming residential real estate. The IRS gives this a 27.5 year life using a straight line. So if the building was in service the entire year it would be 278,907/27.5=10,252. of annual depreciation. You would do a journal entry to debit depreciation expense for the 10,252 and credit accumulated depreciation. Note this is annual. In terms of frequency, that's a personal choice how often you want to post. You would take the annual amount and divide by your frequency so that at year end, the amount in depreciation expense would agree to the deduction.
You should be able to verify the balances of the mortgage payable and escrow back to the mortgage company. The negative cash above does not appear correct. If this activity is being funded with your personal funds, meaning there is no real cash account, then you would post income and expenses through owners equity rather than a fictitious cash account. As an example, you rent the beach house and receive 1,700 in rent which is deposited into you personal account. Debit Owners equity and credit Rental Income for the 1,700. You pay the mortgage out of your personal account Debit mortgage payable, interest expense and escrow and credit owners equity. If your more comfortable using the cash account you can, just remember it represents owners equity. Hope that makes sense.
Mike G, CPA
www.mgfinancial.net
Thank you, Mike. Yes I think it does. I noticed that negative on the Beach House account and was trying to figure out why. So, as you said, I assume this is from transactions entered on the Beach House account, but actually the funds came from somewhere else. For example we may have bought something for the house with our personal Southwest Visa, entered the expense, but since the funds came from somewhere else this creates a negative in the Beach House account. Does that sound right? I will try to track that down and see where missed that. Thanks again!
Tommy
The negative would represent expenses over income that were funded by your personal funds or in other terms owners equity. Like I mentioned you can keep that account but, personally I would not since it does not tie back to anything. Possibly the same with the Visa. If the Visa has both personal and rental business expenses, I would probably leave off as well. Since there is no cash account in the rental properties name, all payments would come from your personal funds as well.
Mike G, CPA
www.mgfinancial.net
Tommy,
I see you provided a date of closing. So depreciation based upon the 278,907 would be 6,340 for the year.
Mike G, CPA
www.mgfinancial.net
Hello Mike,
Again really appreciate all your help. I wanted to run this past you. I saw someone suggest to enter personal mileage into Wave was to create a Vendor called Mileage and create a payable coding it to mileage expense. I did that but also thought maybe that would be a way to get all the expenses I paid outside of the bank account I have set up for our rental business. I can removed the transactions that I originally entered from this bank account which caused the negative. From here on I am trying to make sure all transactions come from my business bank account so everything will just import from the bank. This is to clean up all the entries I have already done from personal Visa, personal checking, etc. In essence, I am the vendor getting paid back from my business. It seems to be looking as if this will. Do you see anything wrong with this approach? Is there a better or easier way to do this? Thank you, Tommy
Tommy,
I do not see anything wrong with this approach, it will get you to the same answer. For me personally, and the clients I do accounting for, I skip the create vendor part because it adds an extra step. However, there is nothing wrong with it. I'm assuming that will zero out the negative cash on hand? Always a good practice to keep business transactions all in one place and limit any personal items in the business accounts.
Mike G, CPA
www.mgfinancial.net
Tommy
Anytime, keep me in mind if your looking for a CPA. I service clients from coast to coast with affordable solutions. Published pricing on my website.
Mike G, CPA
www.mgfinancial.net
Thanks Tommy
Hi all,
I have done the steps that were mentioned here. However, when I generate my P&L report, the liability accounts do not show up in the report. Therefore, the mortgage principal does not show in my P&L report. Can anyone please let me know why the liabilities do not show up in the P&L reports?
I do not think you will see your Liabilities in your P&L report. Check the Account Balances report or General Ledger.
P&L will just show your income and expenses.
Thank you, that is correct.
However, how do I make sure the down payment that I paid for the mortgage shows up in P&L report?
The down payment can very well be involved in my potential loss (or profit), based on whether I sell my asset at a higher or lower price.
It does not show in mine either, but I may have mine incorrect. Hopefully someone else that knows can answer.
@Alireza,
A down payment is not a deduction on the P&L. See my first response above as to how to correctly get a building on the books. The simple way to think of it is that you have an asset - Building. It has a debit balance. For the balance sheet to balance you need liabilities/equity. That would be the mortgage loan. If a down payment came from the owner, then there is the missing amount which would be equity.
Hi @Mikeg ,
Thank you for your response.
Now I understand the process. However, when selling my house (i.e. sales of asset), how come this sale is shown under P&L report? Is there anyway to make it so that the sale of an asset is not shown as an income, and therefore not shown in P&L report?
@Alireza,
I'm assuming you mean a rental property. When you sell and asset, the proceeds are recognized as income (not sales). You would then debit (accumulated depreciation) and credit the asset (building) that was sold from the balance sheet to the income statement. You would recognize any gain or loss on the disposition on the income statement. Payoff of debt is not an expense.
@Mikeg
In @tcmccormick example above. what happens to real estate taxes? do we create an expense account called "real estate tax" and post tax payments to it via Journal Transactions debiting the escrow (asset) account?
@SamB,
You can either create an account for Real estates taxes or just classify as Taxes on the profit and loss. Also you would debit the expense and credit the escrow when the funds are disbursed from escrow via journal entry. The reason journal entries need to be used is because the escrow transactions typically cannot be connected to a Wave account. Thus, transactions have to be recorded manually. Think of your escrow account as another cash account. They are a savings account maintained by your lender.
This seems like a great thread, probably the one closest to the issue I am trying to solve. I've moved our business account from Xero to Wave, which is an LLC for a single investment property. I cannot seem to get myself straight on how to set this up so the mortgage payments show up correctly.
I don't have access to the online account (it's now closed and we sold the property in 2020) nor do I have the statements showing the breakdown of interest and principal. I am trying to wrap up our 2019 taxes on this account.
Can someone show me a step by step on how to set this up in Wave? When I do my P&L, no matter how I've tried it, those payments are still showing up as part of our profits.
@page,
You do not necessarily need access to online statements. Do you have excel? One of the templates is an amortization schedule. Alternatively, you can try an online calculator like
https://financial-calculators.com/amortization-schedule
Hi, I've had this rental for years, and haven't separated out principal and interest ever. Would prefer not to start now. I do understand amort tables, but would like to just categorize these payments as a single payment.
@Mikeg
Your information has been very helpful!
Although I am still trying to figure out how to account for mine in Wave.
Residential Rental Property - Taken over property in Probate.
Mortgage Due at time of Death was higher than FMV.
Cost Basis is FMV. I believe I understand that FMV doesn't go in as Equity - you just figure the Depreciation, and enter it annually as an expense. Got that part (painful 3115/481(a) depreciation catch up lesson this year over that)!
Where I get lost is how to do the journal transactions: For example to debit Mortgage Escrow expense and credit Mortgage Escrow Asset on a split single transaction. It's like I'm trying to split the transaction AND do a journal entry and that doesn't seem to work?
I've done bookkeeping for years but never had to 1. Account for an Asset with a mortgage or Depreciation
2. Do Dual line accounting with journal entries - (QB user) - this is new to me.
Mine is relatively simple, once I get it in my head.
I'm reading these repeatedly and trying to tell myself tricks to remember journal entries.
Debit - lower
Credit - higher
Also - what is the difference or is there really between Owner Equity and Owner Contribution/Draws. They are both Equity accounts.
Equity confuses me.
Thanks Mike!
@Dallgal,
I'll try and address your comments.
Mortgage Escrow - Is an asset and not an expense. Part of the mortgage payment is being transferred to a holding account the mortgage company uses to assure the payment of taxes (avoid liens) and insurance (protecting their asset). When a mortgage payment is made that contains escrow, that amount needs to be split from the payment. Most mortgage payments should be split to three accounts. They are all debits because the withdrawal is the credit.
Debit-mortgage principal (liabiiity)
Debit-Interest Expense (expense)
Debit Escrow (asset)
This can be done via the transaction journal under split transaction. I recommend just setting up a short term asset for the escrow account. Any escrow activity will need journal entries because you cannot typically connect an escrow account to accounting software. Every month you are adding funds to the escrow and when payments are made, a journal entry should be used to record the activity i.e Debit Real Estate Taxes and Credit Escrow. Same for insurance. The opposite will occur to record interest earned.
Debits and Credit either increase or decrease an account depending on the account type
Assets are increased by debits and decreased by credits
Liabilities and Equity are decreased by debits and increased by credits
Income accounts are decreased by debits and increased by credits
Expense accounts are increased by debits and decreased by credits
So in the mortgage payment we have 3 debits and 1 credit
We are decreasing cash for the payment (credit)
Debiting a liability for mortgage principal (reduces debt)
Debiting Interest expense which increases expenses
Debiting Escrow which is essence is moving amounts between asset accounts (Cash to Escrow)
Correct on the Owners Equity and the Contribution/Distribution. They are both Equity accounts. Some may want to use the Owner Equity just to post what they put in when the business opened and from there use Contributions/distributions for post opening activity. For sole props and single member LLC's it does not really matter. The net of all the equity accounts represents true owner equity. In your case since the mortgage balance is higher you would have negative equity. Let's say the building is 100k and mortgage is 125k. For the balance sheet to balance, there would be negative equity of 25k which makes sense in that more liabilities were contributed than assets.
Hope this helps.
@Mikeg
THANK YOU VERY MUCH!!!
You addressed my comments perfectly.
Now, true confession, let me read it about 5 more times - unscramble my brain - and then try to implement it into Wave correctly. :-)
I am positive that was all inclusive of everything I was asking! VERY kind of you to be so thorough!!
@Mikeg
PERFECT!!!! I got it, implemented it, and now my Wave books are PERFECT!!!
THANK YOU times 10 Bazillion, Gazillion!!